SECURE – Update on New Retirement System Legislation

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Two weeks ago, the House of Representatives almost unanimously passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, adopting their version of long-awaited retirement legislation that can now be introduced for deliberation on the Senate side and ultimately head to the President’s desk.   While Congress has discussed this for many years, these policy changes come at a time when life expectancy has increased and a greater number of American retirees must ensure that they don’t outlast their savings. The bill is now in the Senate Finance Committee, where action has slowed as a handful of Finance Committee members have some issues they want addressed before agreeing to vote on it.  

The marquee provisions in the House bill, estimated to cost $16.8 billion over 10 years, include providing tax credits and removing barriers for small businesses to offer retirement plans and boosting the minimum age for required minimum distributions (RMDs) to begin from 70½ to 72 years old. Other significant changes written in the House bill would make it easier for tax-deferred retirement plans, like 401(k)s, to offer annuities and also repeals the age cap for contributing to individual retirement accounts, currently 70 ½. There are also beneficial measures for part-time workers, parents, home-care workers and employees at small businesses, as well.

As reported by the May 23rd WSJ article, the House legislation also repeals a 2017 change to the “Kiddie Tax” that can boost tax rates on unearned income for low and middle income families that had caused surprise tax increases for many, including many military families of deceased active-duty service members . This policy change would also benefit survivors of first responders and college students receiving scholarships. This provision helped accelerate the passage of the bill to resolve a problem for military families right before Memorial Day.

To help pay for these changes, the House bill limits the “stretch IRA” provisions for beneficiaries of inherited IRAs. Currently, beneficiaries can liquidate those accounts over their own lifetimes to stretch out the RMD income and tax payments. The House bill would cut the time down to 10 years, with some exemptions for surviving spouses and minor children.  

A handful of Republican Senate members have some concerns about the House bill, including the House’s resistance to a provision that allows 529 accounts to pay for home-schooling costs. The Senate Finance Committee has introduced a bill closely resembling the House legislation – the Retirement Enhancement and Savings Act. Republican Senators are considering whether to make even broader policy changes than the House bill.

Here are the key items included in the House bill that are of most interest for our DWM clients:

IRAs if you are over 70 ½ – This bill would increase the age for the required minimum distributions (RMD) to begin from 70 ½ to 72. This will allow the accounts to grow and save taxes on the income until age 72. Also, there would no longer be an age restriction on IRA savings for people with taxable compensation – the age had previously been 70 1/2.

401(k)s – Small business employers would be allowed under this legislation to band together to offer 401(k) Plans to their employees, if they don’t offer one already. Long-standing part-time workers would now be eligible to participate in their employer’s Plan and new parents would be allowed to take up to $5,000 from 401(k)s or IRAs within a year of the birth or adoption of a child. Employers would also be required to provide more comprehensive retirement income disclosures on the employee statements and it would be easier for employers to offer annuity options in their 401(k) Plans.

Student Loans/529s – The House version of the bill would allow up to a $10,000 withdrawal from a 529 to be used for student loan repayment.  

At DWM, we are always watching for legislative changes that might affect our clients and will continue to report on these important developments. Please don’t hesitate to contact us with any questions or comments!

Tick, Tock…is it Time for Your Required Minimum Distribution (RMD)?

“Time flies” was a recent quote that I had from a client.  Remember a long time ago…putting money aside in your retirement accounts, perhaps at work in a qualified traditional 401(k) or to an individual retirement account (IRA)?  It’s easy to ‘forget’ about it because, it was after all, meant to be used many years down the road.  It would be nice to keep your retirement funds indefinitely; unfortunately, that can’t happen, as the government wants to eventually collect the tax revenue from years of tax deferred contributions and growth.

In general, once you reach the age of 70 ½, per the IRS, many of those qualified accounts are subject to a Required Minimum Distribution (RMD) and you must begin withdrawing that minimum amount of money by April 1 of the year following the year that you turn 70 1/2.  Of course, there are a few exceptions with regards to qualified accounts, but as a rule, when you reach 70 ½, you must begin taking money from those accounts per IRS guidelines if you hold a traditional 401(k), profit sharing, 403(b) or other defined contribution plan, traditional IRA, Simple IRA, SEP IRA or Inherited IRA.  (Roth IRA withdrawals are deferred until the death of the owner and his or her spouse).   Inherited IRAs are more complicated and handled with a few options available to the beneficiary, either by taking lifetime distributions or over a 5 year period.  The importance here, is to be aware that a distribution is needed.  Another word of caution…In some cases, your defined contribution plan may or may not allow you to wait until the year you retire before taking the first distribution, so a review of the terms of the plan is necessary.  In contrast, if you are more than a 5% owner of the business sponsoring the plan, you are not exempt from delaying the first distribution; you must take the withdrawal beginning at age 70 1/2, regardless if you are still working.

The formula for determining the amount that must be taken is calculated using several factors.  Basically, your age and account value determine the amount you must withdraw.  As such, the December 31 prior year value of the account must be known and, second, the IRS Tables in Publication 590-B, which provides a life expectancy factor for either single life expectancy or joint life and last survivor expectancy, needs to be referenced.  The Uniform Lifetime expectancy table would be referenced for unmarried owners and the Joint Life and Last Survivor expectancy table would be used for owners who have spouses that are more than 10 years younger and are sole beneficiaries.  It comes down to a simple equation: The account value as of December 31 of the prior year is divided by your life expectancy.  For most individuals, the first RMD amount will be roughly 4% of the account value and will increase in percentage each year.

It all begins with the first distribution, which will be triggered in the year in which an individual owning a qualified account turns 70 ½.  For example, John Doe, who has an IRA, and has a birthdate of May 1, 1949, will turn 70 ½ this year in 2019 on November 1.  A distribution will need to be made then after November 1, because he will have needed to attain the age of 70 ½ first.  Therefore, the distribution can be taken after November 1 (for 2019), and up until April 1 of the following year in 2020.

Once the first distribution is withdrawn, subsequent annual RMDs need to be taken for life, and are due by December 31.  In this case, John Doe will need to next take his 2020 distribution, using the same formula that determined his first distribution.  This will become a regular obligation of John’s each year.

So, we’ve talked about who, what, why and when, now let’s talk about the where.  Once the distribution amount is calculated, an individual can then choose where he or she would like that money to go.  Depending on circumstances, if the money is not needed for living expenses, it is advised to keep the money invested within one of your other non-qualified accounts such as a trust, individual or joint account, i.e. you can elect to make an internal journal to one of your other investment accounts.  Alternatively, if you have another thought for the money, you can have it moved to a personal bank account or mailed to your home.  Keep in mind that these distributions are taxed as ordinary income, thus, depending on your income situation, you may wish to have federal or state taxes withheld from the distribution.  At DWM, we can help our clients determine if, and what amount, to be withheld.  One exception is the qualified charitable distribution or QCD, which is briefly discussed next.

Another idea that may be a possibility for some individuals is for the distribution amount to be considered a qualified charitable distribution (QCD).  Instead of the money going into one of your accounts, a direct transfer of funds would be payable to a qualified charity.  There are certain requirements to determine whether you can make a QCD.  For starters, the charity must be a 501 (c)(3) and eligible to receive tax-deductible contributions, and, in order for a QCD to count towards your current year’s RMD, the funds must come out of your IRA by the December 31 deadline.  The real beauty about this strategy is that the QCD amount is not taxed as ordinary income.  You would simplyprovide the QCD acknowledgement receipt(s) along with your 1099R(s) to your accountant for the correct reporting on your tax return.

It may be pretty scary to know how quickly time flies, but with DWM by your side, we can take the scare out of the situation!

Put Longevity into Your Planning

We’re living longer.  Back in 1935, when Social Security was started, there were 8 million Americans 65 or older.  Today, there are 50 million and by 2060 there will be 100 million 65 and older. It is projected that in 2033, the population of 65 and older will, for the first time, outnumber those under 18.

In addition, there is a better than average chance that 65 year old investors with at least $1 million of investable assets will reach age 100. These folks not only have enough money to cover rising costs, they are also generally more physically fit, healthier and engaged.  BTW- May is Older Americans Month, with a theme of “Engage at Every Age.”

Longevity is having and will have a huge impact not only on social security but also on long-term financial planning.  The trust fund for social security retirement benefits is expected to be depleted by 2034.  After that, the program is projected to pay out about 75% of benefits.  At that time, the ratio of workers paying into Social Security, as compared to those receiving benefits, is projected to drop from 2.8 now to 2.1 then. Last month, Ginny provided information on social security including possible fixes http://www.dwmgmt.com/blogs/142-happy-national-social-security-month-.html.  We hope Washington will enact some appropriate changes soon, though we can’t control that process.

We can, however, control our own financial planning.  Here are some general tips on incorporating longevity into your planning:

  1. Plan based on living longer. For those of you in great health, use an eventual age past the actuarial age, perhaps even age 100.  Your plan may end sooner, but let’s make sure the plan is designed for you to have sufficient funds during your life time.
  2. Plan on your normal retirement expenses continuing until at least age 90. Most older Americans we know are engaged. They are working and volunteering, traveling, mentoring, learning, and participating in activities that enrich their physical, mental and emotional well-being.  Don’t expect your normal expenses to start declining before age 90.
  3. Plan on health care costs escalating faster than inflation. Investors worldwide agree that health expenses are their biggest financial concern related to longevity. This worry is most acute in the U.S. with 69% listing it as their number one worry, versus 52% globally.  We are currently using 6% as the estimated annual increase in health care costs in our planning for clients.
  4. Review your long-term care strategy early. Long-term care costs can be huge.  On the other hand, your plan might “end” without you ever needing long-term care.  What would be the cost and best way to insure? Should you self-insure?  Should you keep your current policy?  Should you modify it?  Every financial plan needs to address long-term care and develop an appropriate strategy.
  5. Use an ample estimate for inflation. Inflation can have a huge impact on expenses over a long period of time.  You should stress test the plan at inflation rates above 2%, such as 3% or higher.
  6. Use a realistic real return for investments. The real return for your investments is defined as your total return (which is the price change over the period + dividends/interest) less inflation.  From 1950 to 2009, the real return was 7%; composed of an 11% total return less 4% inflation.  Of course, the 50s, 80s and 90s all had double digit real returns.  Today, it’s a good idea for you to stress test your plan projections using lower real return assumptions like 2.5% to 4%, depending on your time horizon and asset allocation.
  7. Consider separating travel goals into two parts. When you are retired and mobile, your travel will likely be primarily for you (and your significant other) and may include your children and/or grandchildren. As you get older and can’t travel easily yourself, you might still provide a second travel goal to cover transportation of the kids and grandkids to come visit you.
  8. Don’t count on too much from Social Security. We work with successful people of all ages.  We think that long-term social security benefits may be subject in the future to some “means test,” perhaps the same way that Medicare Part B premium costs are tied to taxable income.  The younger you are now and more financially successful you are in your life will likely reduce the amount of social security you will eventually receive.  If you are not starting social security soon, consider using discounted values of future social security benefits in your planning.
  9. Work to have a planning graph that doesn’t go “downhill.” Our financial goal plans show a graph of portfolio value over time, beginning now until your plan ends.  If expenses and taxes exceed income and investment earnings in any year, then the portfolio declines.  If that situation continues, then the graph looks as if it is heading “downhill.”  A solid plan results in the graph moving uphill over time or at least staying level.  A solid plan therefore reduces anxiety about longevity as, year by year, the portfolio value stays “solid” without diminishing.

 

Just like possible changes in social security, none of us can control our future health or when our plan will end.  We can however, develop, monitor and maintain a long-term financial plan that will provide us with the best chances for financial success by recognizing the possibilities of longevity and incorporating it into all aspects of our planning.  We can also adopt and/or confirm an objective to “Engage at Every Age” for our own well-being, as well as making a difference in other’s lives.   If you have any questions, please give us a call.